Newest Rate Hike Will Not Hurt Auto Sales Badly But They Do Add Up

Analysts don’t expect much if any immediate impact on U.S. auto sales, from the Federal Reserve today raising its benchmark fed funds target range by 25 basis points.

“We’re a little concerned for rates but not too concerned yet,” said Charlie Chesbrough, senior economist and senior director of industry insights for Cox Automotive.

“The real concern is a year from now, when it’s gone up 100 or 200 basis points, then you’re talking a real increase in costs,” he said in a phone interview earlier this week, anticipating the Fed announcement.

But even with the increase, interest rates still didn’t make the Top 5 ranked dealer concerns in the survey, and well below the Top 3 survey responses, “market conditions,” “limited inventory,” and “credit availability,” Cox Automotive said.

The central bank’s move today was the second rate increase this year, and the fifth since late 2016. There’s some debate how many more times the Fed would raise rates this year, depending on how well the economy is doing. Analysts said the most likely scenarios are either once or twice more.

On May 2, the Federal Open Market Committee opted to stand pat on rates. The committee said in a statement rates were still relatively low, and additional increases were likely.

“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the committee said last month.

For the U.S. auto industry, the rate increases haven’t done much to reduce demand. The rate increases are a headwind, but they have been gradual, and rates were low to begin with.

In fact, Chesbrough said earlier this week that despite increasing interest rates Cox Automotive recently increased its full-year U.S. auto sales forecast slightly, to 16.8 million, from a previous forecast of 16.7 million. U.S. auto sales were about 17.2 million in 2017, down about 2 percent from a record 17.6 million in 2016.